U.S. Natural Gas Fund Still Active in 2009

By Asjylyn Loder

July 24 (Bloomberg) -- United States Natural Gas Fund, the world’s largest fund in the commodity, bought an off-market gas swap for the first time in a sign that it has outgrown the main markets for fuel futures and swaps.

The $4.4-billion fund purchased a $250 million bilateral swap that isn’t subject to the size limits imposed by the New York Mercantile Exchange, where the fund holds $480-million worth of natural gas futures and swaps. The shift comes as regulators debate imposing similar limits on the Intercontinental Exchange, where the fund has $3.1 billion, or 71 percent, of its holdings.

“We have worked under these assumptions for three and a half years, since we introduced the first fund in oil, that if the funds reached a certain size, they would, for a variety of reasons, including regulatory concerns, have to start to make use of alternatives to the futures,” John Hyland, the fund’s chief investment officer, said today in a telephone interview. “These total return bilateral swaps were the most obvious alternative.”

The exchange-traded fund grew 11-fold since the start of the year to 347.4 million shares before it ran out of new shares on July 7. It is awaiting permission from the Securities and Exchange Commission to sell 1 billion more.

The fund sold 26,950 natural gas swaps cleared by the Intercontinental Exchange Inc., replacing them with the bilateral swap worth $250 million, according to the fund’s Web site.

Oil Fund

Related funds, including the United States Oil Fund, may soon enter into similar trades, Hyland said. Both funds are managed by United States Commodity Funds LLC of Alameda, California. The company also manages funds in heating oil and gasoline, and has asked the SEC for permission to introduce a fund that shorts oil.

For every share sold, the fund makes an investment in natural gas contracts. It holds front-month futures and swaps, selling them as they near expiration and buying the next month.

The natural gas fund rose 45 cents, or 3.5 percent, to $13.33 a share on the New York Stock Exchange. Natural gas for August delivery rose 14.5 cents, or 4.1 percent, to settle at $3.695 per million British thermal units on the Nymex.

CFTC Hearings

The Commodity Futures Trading Commission will hold hearings next week on whether size limits should be imposed on energy commodity investors, including ETFs. The hearings stem from concerns that the gas fund and others like it contributed to the run-up in fuel prices last year.

The fund, which trades under the ticker UNG, said in a regulatory filing today that it does not influence prices.

“Many of the articles published on this topic have stated that UNG’s large size, and the fact that it was the first publicly offered, exchange traded vehicle that offered exposure to natural gas futures, made it a key factor in the rapid rise of natural gas prices in 2008,” the fund said in the filing with the Securities and Exchange Commission.

The fund said that reports “significantly mischaracterize” its role in the market, and that the claims that it influences prices “lack merit.”

The bilateral swaps may come under new regulation in the future, said Tim Evans, an energy analyst with Citi Futures Perspective in New York.

“Since the regulatory picture is in transition, we don’t know at what point the CFTC or other body might still be interested in tracking these exposures and possibly putting limits on them,” Evans said in an e-mail today. “The SEC might be considering that now as they review the UNG application to increase the number of shares.”

Hyland said that the fund will cope with those limits if they arise. “There could be rules that someone could impose and we would have to deal with that.”

To contact the reporter on this story: Asjylyn Loder in New York aloder@bloomberg.net.